Warzones heat up as US-China conflict continues

China is positioning itself to make an RMB “backed by gold and verifiable by Blockchain the safest reserve currency in the world once the US dollar gets toppled”

Warzones heat up as US-China conflict continues
Warzones heat up as US-China conflict continues

Weeks from a Presidential election that could decide its future for generations, Taiwan is at Ground Zero in the escalating battle for primacy between the United States and the People’s Republic of China (PRC). Viewed narrowly, the contest in Taiwan is between two rivals, the KMT’s Han and the DPP’s Tsai. The 11 January 2020 verdict will determine whether the latter will win a second four-year term in office. Looked at from a wider perspective, the political contest now taking place is, in reality, a proxy battle between Washington and Beijing. While President Tsai would further deepen the security linkages to the United States that she has quietly established during her term, KMT standard-bearer Han as President would once again open wide the doors for the PRC to various segments of Taiwanese society and to sectors of the economy. He would open such doors even wider than was the case under the last KMT President, Ma Ying-jeou.

During the eight years (2008-2016) that Ma occupied the office of the President of the Republic of China (Taiwan) in the stolid building housing the Office of the President, business, transport and cultural links between the two sides of the Taiwan Straits expanded phenomenally, getting rolled back substantially only after DPP Presidential candidate Tsai Ing-wen defeated the KMT’s Eric Chu in 2016. Much of the rollback has been caused by the decision taken by Beijing to constrict the Taiwanese economy by sharply reducing tourist and investor arrivals from the PRC to Taiwan, in the expectation that the resulting economic pain would persuade enough Taiwanese voters to change sides so as to ensure a KMT victory. President Tsai, to discontent among the firebrands within her party, has been careful to avoid the provocative verbal challenges to China that were a staple during the years in power of the First Republic of China (RoC) President belonging to the DPP, Chen Shui-bian. However, steadily albeit silently, Tsai has multiplied links between Taiwan and the major democracies, including India and Japan.

Household debt in China is another factor that is factored in as a causative agent for a significant acceleration in PRC economic woes in the coming period. An analyst pointed to the fact that 60% of the additional global debt created since 2008 originates in China.

Most importantly, the level of security cooperation between Taipei and Washington is rising to levels not seen since the decisions taken during the 1970s and afterwards (especially by Presidents Nixon, Carter and Clinton) to downgrade ties with Taipei so as to better meet the requirements of Beijing. During the three years of the Trump administration, the US has substantially ramped up its engagement with Taiwan. The symbolism of the newly opened massive presence of the US mission in Taipei is not lost on passers-by, although security and defence cooperation between the two sides remains mostly under the radar.

THE TAIWAN FRONT

Russia has settled into the role of being the most reliable security partner of a rapidly rising China, under a decisive leader Beijing has replaced Moscow at the apex of the security calculus being developed within the Pentagon. In an actual contest, there will be only one winner. The game is played between the US and China is not Win-Win but Zero Sum, no matter how hard Donald Trump and Xi Jinping talk in the manner of best friends. It is no secret in Taipei that the DPP would like to see the US prevail, while the KMT has long been rooting for the PRC.

Needless to say, it is among the world’s historical ironies that the KMT, which under Generalissimo Chiang Kai-shek fought (and lost) a bloody civil war with the Chinese Communist Party (CCP) fighting under the leadership of Mao Zedong, has evolved into an ally and admirer of the CCP. As President of the RoC, the KMT’s popular and populist Han Kuo-you would be welcoming of a close embrace of the PRC. However, aware of the sensitivities of the Taiwanese electorate about safeguarding their freedoms, the CCP has adopted a low key approach to the 11 January 2020 Presidential election in Taiwan, and has even been silent when Han has intelligently made occasional anti-CCP noises so as to win over voters who may otherwise side with Tsai because of her consistently independent approach vis-a-vis Beijing. However, such tactics scarcely conceal the fact that the KMT candidate is the favourite of the superpower next door, while Tsai is preferred by the more distant superpower across the waters of the Indo-Pacific. The 2020 Presidential elections in Taiwan clearly represent an important front in the war between China and the US, a struggle over which of the two countries will dominate the geopolitics of the coming era. It is, therefore, a good location to meet specialists and planners studying both sides of the divide.

ALL NOT WELL IN CHINA

Planners eager for a US victory are relying on factors including

(1) The demographics of China to ensure such an outcome. They point out that the proportion of the Chinese population that is of working age has begun declining since 2015, and that this downward trajectory will continue at least until 2040. In contrast is India, which will experience substantial increases in the working-age population for decades to come. The bulge in India would more than compensate for the decline in Japan, Germany and other traditional US security partners, of course assuming that Washington and Delhi overcome hesitations in both capitals and become defence and security allies. The Lutyens Zone is known for its impeccable record of “never missing an opportunity to miss an opportunity”, and would like to keep India away from such an alliance, no matter what the economic and strategic gains for India would be from such a pairing. The impact of the decline in the working-age population in China is expected to slow down growth in the PRC economy, a situation that seems to have begun in 2015 itself (the year when the Chinese working-age population began to decline).

(2) Gender imbalance. War planners point out that the One Child policy implemented since the 1970s by the PRC has led to a growing gender imbalance, that has even in the present resulted in nearly 40 million Chinese males being unable to find spouses of the opposite sex. Studies show that gender imbalance in China crossed the level of criticality in 2010 and is expected to peak around 2035. Historical analyses demonstrate that a lack of available partners of the opposite sex results in a rise in the propensity for violence and crime among affected men, trends that are already becoming manifest within China. An analyst of US-China tensions based in Hong Kong pointed to the “Nien Rebellion” in China of the mid-1800s, in which more than 15 million people were killed, and which cost the Qing dynasty rulers six times more to subdue than the Opium Wars.

Changes in male behavioural patterns as a consequence of gender imbalance within the population are presumably behind the reluctance of the CCP to do away with the houkou system, a set of regulations that constrict migration from rural areas (where the gender imbalance is particularly severe) to the cities. The worry is presumably that uncontrolled migration would lead to law and order problems of almost unmanageable proportions, something inevitable (in the view of this planner) once the male: female ratio reaches 115:100, as it already has in several parts of China. The Chinese leadership is seeking to create palliatives for the gender imbalance through expanding the scale of availability and operations of online videos and online gaming, which they hope will occupy males deprived of the calming and healing effects of female companionship. However, the overall assessment of US-China battle planners is that this factor will ensure spikes in violence and mob behaviour by PRC citizens in the future.

The present situation in Hong Kong has shown that even relatively high-income urban populations are vulnerable to such tendencies, and the forecast of some war planners is that what is taking place in Hong Kong could before much longer get replicated in other Chinese cities having the same problem of a handful of very rich individuals connected to the CCP cornering land, thereby making adequate housing unaffordable even to the middle and professional classes. This leaves President Xi with a difficult choice: annoy CCP tycoons by bringing down land prices to make housing units affordable to lower and mid-level income groups or risk street violence caused by those who regard it as a hopeless hope that they can ever enjoy a better lifestyle in a country where every month new billionaires get created.

(3) Household debt in China is another factor that is factored in as a causative agent for a significant acceleration in PRC economic woes in the coming period. An analyst pointed to the fact that 60% of the additional global debt created since 2008 originates in China. They add that the current PRC debt ratio of 250% of GDP is unsustainable. The fact that Chinese household debt is higher than even US household debt means, in their view, that any “domestic consumption-based model” of Chinese economic expansion is a mirage, as “households carrying such a substantial debt burden would not add much to consumption expenditure”, except for basic necessities. Most of the debt is in the real estate sector, which appears to be on the path to a sizeable downward reset in prices, given the locking out of the housing market of tens of millions of eager buyers as a consequence of inflated prices. At the same time, money locked in hyper-expensive housing means that there is less available for other items of expenditure, spending that is necessary if investment in creating fresh output is to grow. And if the investment fails to take off, so will job creation, thereby leading to aggravated societal tensions, as are presently being witnessed even in the economically advanced territory of Hong Kong. Money supply in China is at 200% of GDP, as compared to the “high” figure of 100% of GDP in the US, another factor that is expected to impact economic performance even under a powerful and resourceful leader such as Xi Jinping.

President Xi Jinping declared on 22 October that adoption of Blockchain technology would form part of the core of state policy

US-CHINA CONFLICT

A consideration motivating much of the activity tasked with ensuring both the primacy of the US into the 21st century is the conclusion that kinetic conflict between the two sides may be the only way to divert growing social aggression and tensions away from the domestic leadership to an external enemy. Such a conflict may (in the view of those involved in planning and analysis of the US-China battle for primacy in the 21st century) erupt in a range of theatres, “most likely the Taiwan Straits, the South China Seas and (because of the China-Pakistan alliance) South Asia”. There could also be multiple proxy conflicts elsewhere, especially in the Middle East, Africa and South America.

Those warning of a possible Chinese victory in that country’s contest with the US pin much of their calculations on the danger of a collapse of the US dollar as the global reserve currency and the surrender of the Numero Uno position of the US economy to China within a decade. They point to the “unsustainable” level of US$260 billion that was printed by the Federal Reserve in just a 45-day period, which is more than twice as much as was printed during the period of Quantitative Easing III. The US Treasury under Secretary Steven Mnuchin has been increasing expenditure with cutbacks rather than increases in tax revenues. Such increases are funded through the printing of money by the Federal Reserve, cash that is then directed back to the Treasury, incentivising it to incur still more expenditure. Planners fearing a US defeat (and there are several more such voices in 2019 than was the case in 2015) at the hands of China say that from August 2018, US tax receipts barely cover social security, medicare and interest on debt, leaving zero balance for other expenses, including the ballooning cost of defence.

This would not have been a problem in a situation where the US dollar rules the financial markets, except that external demand for US dollars has been going down since 2015, while even domestic buyers appear to have begun the process of bailing out of US dollar holdings during the final months of 2018. The 2013 and 2017 “weaponizing” of the US dollar against Iran (when that country was deemed to be compliant in the obligations Teheran undertook in the Joint Comprehensive Plan of Action) has had the collateral effect of sharply lowering confidence in the US dollar as a global reserve currency, for fear that such weaponization of the currency for political reasons may impact other countries as well. The expectation of those pessimistic about the US side prevailing in the contest with the PRC is that there will be a substantial depreciation of the US dollar within the next term in office of the President of the US, whether this is Trump or another individual.

BLOCKCHAIN AGAINST DOLLAR

Under President Xi Jinping, China has quietly been making moves to prepare for just such a reset in the value of the US dollar, and for the subsequent toppling of the currency from its post-1971 position of global reserve currency of choice for the world. Since President Xi took office in 2012, the PRC has bought gold on an unprecedented scale, purchasing about 30-50 tonnes each month, while at the same time producing more gold domestically than any other country, none of which is allowed to be exported. The present gold reserves within the control of the authorities in China are estimated to be as high as 15,000 tonnes, with some estimates breaching the 20,000-tonne mark.

Combined with the move by Xi Jinping to install Blockchain technology within the monetary system, the opinion of war planners and forecasters is that China is positioning itself to make an RMB “backed by gold and verifiable by Blockchain the safest reserve currency in the world once the US dollar gets toppled”, according to a war planner who studies developments in the PRC from his home base. Asked about the problems created by the enormous debt burden in China, the response of planners pessimistic about US prospects for victory (especially in the context of India adopting a non-aligned policy during the conflict) was that “the communist state owns all the land in the country”, and that such a holding provides a reserve to sustain even so large a debt. “So long as its citizens have confidence in the longevity of the rule of the CCP, the leadership core will have the means to ensure that a meltdown in the economy does not take place”, an analyst temporarily based in Hong Kong stated. Of course, a prime objective of war planners hostile to the notion of China replacing the US as the global Numero Uno is to ensure that conditions get created that would substantially erode such a trust in the CCP among citizens of the PRC. Meanwhile, the Chinese leadership has not been complacent of the dangers facing its continued control.

In a sign that he recognises that the 21st century requires a paradigm change in economic and financial policy, President Xi Jinping declared on 22 October that adoption of Blockchain technology would form part of the core of state policy. Meanwhile, the Peoples Bank of China has unveiled a Digital Currency Electronics Payment system that has been reinforced by the PRC’s new cryptocurrency law. Together with advances in Artificial Intelligence (which relies less on innovation than on continuous and massive inputs of data) and biotechnology, Xi Jinping is seeking to convert China into a global technological powerhouse that will far outstrip the US. In such a context, taking over control of Taiwan with its advanced computing and tech skills is a priority for the PRC. Not surprisingly, preventing this from taking place has become a core US interest.

According to the war planners spoken to, the Belt & Road Initiative “has become a method for China to exchange soon-to-depreciate US dollars into physical assets” in a range of countries. Countries involved in the BRI incur debts to China that finally get repaid by transfer of assets to PRC entities, as has recently happened for example in Sri Lanka. Thus, US dollars (the currency mostly used for BRI financial computations) are being exchanged for physical assets that can collectively add to China’s ability to replace US-controlled global supply chains with their own. At the same time, China has become a key holder of Bitcoin, even while Indian monetary authorities seek to roll back the waves in the manner of Canute bypassing an impossible to enforce a law banning bitcoin. China sought to do the same in 2017 and quickly reversed course once the CCP leadership understood both the impossibility of such a prohibition as well as the advantages of being a world leader in a currency of the future attuned to internet-enabled systems and processes.

LUTYENS THOUGHT IN INDIA

About the role of India in the US-China contest, little is known about the views of the establishment, and the less said about what little is known the better. Lutyens Zone thought still appears to permeate some sections of the establishment, with the consequence that India is at risk of becoming a bystander rather than a major player in the Global Great Game being played out on the geostrategic chessboard. Chidambaram-era policies that have been continued by North Block are extinguishing the widespread expectation of sustained double-digit growth that got formed when Narendra Modi became Prime Minister in 2014.

“Either policymakers in India are unaware of the situation, or are not bold enough to make the moves needed to take advantage of it”, pointed out an analyst, adding that “the existing window of opportunity for India to leverage geopolitical conditions to substantial advantage will close once the US-China contest is on a clear path to a decisive verdict, and such an outcome will happen within the next US Presidential term”. Citizens with faith in Narendra Modi look forward to Modi 2.0 getting supercharged in the period ahead, thereby avoiding Jawaharlal Nehru’s mistake of frittering away several opportunities that were open to India during the 1950s. That period witnessed dismal economic growth and increased rather than reduced state control over the lives of citizens and private institutions.

Note:
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

M D Nalapat
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